What can we expect from the markets in the next administration? President Trump has an unusual ability to surprise, especially as a relative newcomer to the federal policy making scene. This suggests that the next few years will present more volatility in the markets than we have come to expect. This impact may feel exaggerated at first, as the last few months presented below-average volatility in the equity markets.

The appearance of a Trump administration could push up equity prices in some industries. For example, fossil-fuel energy companies, weapons manufacturers, and other defense related companies may benefit, at least in the short term. Rallies may also be seen in pharmaceutical/biotech and financial related company equities as expectations of tighter regulation in these industries drop away.

It is also possible that the equity of companies dependent on a large minimum-wage workforce may appreciate in the short term, as expectations of an increase in the minimum wage weaken. These companies include, for example, fast-food/fast-casual restaurants and big box retailers. Below are some possible sector winners and losers in an all Republican Government.

Source: Strategas

The last three (Republican-controlled) Congresses have generally prevented the sitting democratic president and his party from creating law. The resulting gridlock has restricted policy innovation. In this environment, change to our legal landscape has come through administrative rule-making and other changes in how existing law is enforced. This circumstance has coincided with a strong period for the equity markets.

Today’s Republican sweep of both the legislative and executive branches of government suggests a break from the gridlock of the last six years. How the G.O.P. will use its power to enact legislation remains to be seen, as internal party governance has faced its own gridlock of late.

What does this mean for the equity markets? As usual, there are well reasoned arguments for extreme hope and extreme pessimism. Expectations for extreme change of any sort are likely overblown. As the chart below shows, the stock market has historically performed well during Republican control.

Source: Strategas

Typically, regardless of the outcome of the elections, a relief rally follows through year-end. Seasonality is also supportive of a November/December rally.

Source: Strategas

Early Market Reaction

Equity futures markets had strong negative reactions overnight when it became clear that Trump had sufficient electoral votes. The losses have softened this morning as Trump called for unity and cooperation. The Fixed Income markets, which often lead the longer term equity markets, are showing a steepening yield curve. This could be an early indication of confidence in the longer term outlook for growth, consistent with favorable equity markets.

While short term volatility can sometimes be uncomfortable, volatility is the way that the markets find their way back to values reflective of new economic conditions and expectations. We remain positive on stocks and see improving earnings as the primary theme for the market as we look out into 2017. This is why it is critical to maintain a long term perspective and an appropriate asset allocation.